CannTrust faces cannabis shortage in Canada due to facility non-compliance

CannTrust has put over 10,000 kilograms of its cannabis stock on hold after Health Canada found five of its production rooms were not compliant with its policies — creating a new challenge for cannabis supply in Canada.

CannTrust said in a statement that Health Canada’s non-compliance assessment is due to cannabis grown in five unlicensed rooms in a 12-room facility in Pelham, Ontario, and due to inaccurate information provided by CannTrust employees.

CannTrust says that cannabis was grown in those facilities from October 2018 to March 2019 while it had pending applications for their licensing with Health Canada. Licenses were issued for the rooms in April 2019.

Health Canada has placed a hold on 5,200 kg of dried cannabis harvested in the five rooms until it deems the company is compliant, according to CannTrust. The company says it is also voluntarily putting on hold around 7,500 kg of dried cannabis at its Vaughan facility that was produced at the unlicensed rooms.

“Due to the product on hold, some CannTrust customers and patients will experience temporary product shortages,” CannTrust said in the statement. “The Company is exploring options to mitigate these shortages.”

Ontario has already faced cannabis shortage in Canada this year, with the initial rollout of Ontario Cannabis Stores (OCS) limited to 25 stores due to shortages.

CannTrust says Health Canada is conducting quality checks on the product in question in Penham, and results are expected in the next 10 to 12 business days.

CannTrust shares plunged after the news broke, going down $1.23, or 19 percent, to $5.23 on the Toronto Stock Exchange (TSX) in the late morning Monday, and fell as low as $5.03 after the market opened — its lowest level since 2017.

The amount of cannabis CannTrust has put on hold could pose trouble for the company, as RBC Capital Markets analyst Douglas Miehm estimates it represents the majority of the company’s cannabis stock.

“As a result, we believe there is meaningful risk to revenue growth over the coming months,” he said in a note to clients. “CannTrust shares may also trade at a wider discount to the peer group given the outstanding questions about the company’s internal quality controls and/or governance.”

Jefferies analyst Ryan Tomkins said he believes there will “undoubtedly be a financial impact.”

“They will have to go to the open market to fill the shortage gap with little bargaining power, which means they could pay inflated prices or take an inferior product which could lead to lost market share,” he said in a note to clients.

CannTrust says that despite the non-compliance, “all product sold from the impacted rooms has passed quality control testing at Health Canada-certified labs as well as CannTrust’s own quality control processes and safety reviews.”

“We have made many changes to make this right with Health Canada,” CannTrust CEO Peter Aceto said in a statement. These changes include hiring external advisors to ensure compliance and voluntarily advising Health Canada of possible issues at its Vaughan facility, according to the company.

“We made errors in judgment, but the lessons we have learned here will serve us well moving forward,” Aceto said.